AASB 16 Leases has now been effective for over 10 months, and RSM Australia’s Technical Accounting team is receiving an increasing number of questions about its implementation.
We discussed the transitional options available in our earlier article, so in this article, we will consider some common implementation concerns.
The scope of AASB 16 broadens the definition of a lease to capture any contract, or part of a contract, which conveys the right to use an identified asset for a period of time in exchange for consideration, which provides an entity the right to obtain substantially all the economic benefits from the use of the identified asset.
How does this apply to non-standard contracts, in which assets can be contractually substituted by the supplier for other equivalent ones, or to leases in which rent payable partially depends on turnover levels, thereby preventing the entity from obtaining all the rewards from the lease?
EXAMPLE 1 | UNAVAILABLE ALTERNATIVE ASSETS
A mining company, Entity A, requires the use of an engine in its mining operations, of a very specific design and type. The supplier has only one such item available in the geographic area, which is remote.
Because of the lack of availability of other appropriate engines, this contracted engine is likely to be considered a “specifically identified” asset.
EXAMPLE 2 | SUBSTITUTION RIGHTS
Entity B enters into an agreement with a supplier for the provision of construction activities. The contract contains a list of vehicles, identified by make and model, for use in these activities. However, the agreement gives the supplier the right to substitute the identified vehicles for other similar vehicles throughout the period of use. There are no practical impediments to the supplier substituting vehicles.
In this example, the substitution right is substantive rather than protective. Therefore, these vehicles would not be considered “specifically identified assets,” and the contract would not be treated as a lease.
This results in the scenario that some assets which are implicitly specified in agreements due to their specific ability to suit the entity’s needs may well be in the scope of AASB 16, and that some assets which are apparently explicitly identified, may not be in the scope of AASB 16. Preparers must take care to ensure that only contracts which provide an entity with the right to direct the use of specified assets during the whole period of the lease are accounted for under AASB 16.
For more information
If you have any questions regarding the implementation of AASB 16 Leases, please contact your local RSM office today.